08 Poloroid Corporation

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UVA-F-1181
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POLAROID CORPORATION, 1996

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In late March 1996, Ralph Norwood, the recently appointed treasurer of Polaroid
Corporation, reflected on several matters of concern about the firm’s debt policy that required his
attention in the coming months. One immediate concern was Polaroid’s outstanding $150-million,
7.25% notes, which were due to mature in January 1997. Investment bankers, keenly interested in
garnering advisory and underwriting business from Polaroid, had sought to present proposals for
refunding the issue. Norwood felt, however, that any refunding decision should be part of a larger
This document is authorized for use only by Prof. Debasish Maitra at IIM Indore.
review of the firm’s financial policies. Accordingly, he undertook a review of the firm’s overall debt
policy, focusing primarily on the mix of debt and equity and on the maturity structure of the debt. He
also sought to consider issues of control, the establishment of any special advisory relationships, and
the use of new financial instruments.
In recent years, Polaroid’s share price had traded in a narrow range, reflecting small sales and
earnings growth. A new plan to exploit aggressively the existing Polaroid brand, introduce product
extensions, and enter new emerging markets (such as Russia) had been proposed to spur the firm’s
performance. The restructuring plan was spearheaded by Gary T. DiCamillo, the first outsider
appointed chief executive officer (CEO) in the firm’s history. DiCamillo had only recently joined the
firm in November 1995. Norwood believed that the plan would reinvigorate the company without
materially increasing its operating risk. With important changes in the works, Norwood felt it
essential that his financial policies afford Polaroid the necessary funding and flexibility to pursue the
initiatives of the new CEO.
The Early Years
Polaroid Corporation was founded in 1937 by Edwin Land, who had dropped out of Harvard
College to pursue ideas on the polarization of light. The early years of Polaroid reflected Land’s
characteristics: inventive, determined, and single-minded. The first instant camera was produced in
1948 and from that moment, 90% of the company’s efforts were dedicated to the development of the
field. Within four decades, sales of the firm grew from $142,000 to over $1 billion, largely on the
basis of Land’s interest and oversight of the research effort in instant photography. Significant
breakthroughs included instant black-and-white film (1954), instant color film (1960), and the SX-70
camera and film (1972) which freed the user from having to coat the developing picture.
This case was prepared by Professors Robert Bruner and Susan Chaplinsky as a basis for class discussion rather than to
illustrate effective or ineffective handling of an administrative situation. Copyright © 1997 by the University of Virginia
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In 1977, the firm’s sales exceeded $1 billion for the first time, though this achievement was
offset by increasing pressures from the sales force for new sources of growth, in the form of cheaper
products. Internally there had been major efforts to develop products beyond instant photography:
document copiers, and an instant movie camera and film. The movie project debuted in 1977 as
Polavision, an instant motion picture technology. Unfortunately, sales languished largely because of
the advent of video-camera technology. In 1979, the directors wrote off Polavision’s inventory of
products and effectively exited from the business. In 1980, Land stepped down as CEO of the firm;
he retired from the board in 1982 and a year later sold his Polaroid stock in a public offering.
Recent Financial Performance

The two most notable events of the past decade were prompted by the actions of others. In
1976, the Eastman Kodak Company introduced an instant camera and film product that threatened
Polaroid’s dominance of the instant-photography field. Polaroid sued Kodak for patent infringement,
and 10 years later, in 1986, was awarded the largest patent judgment in history, some $900 million.
Meanwhile, few significant new products were developed during this time. In 1988, with no large
shareholder like Land to protect the firm and expecting the proceeds from the Kodak patent
judgment, Polaroid received an unsolicited tender offer from Shamrock Holdings. Shamrock
proposed to pay the shareholders an extraordinary dividend from the Kodak proceeds, and to manage
the company more tightly. Polaroid’s management wanted to reinvest the proceeds in the business.
To fend off the takeover threat, the firm conducted a leveraged recapitalization, which involved the
innovative use of an employee stock ownership plan (ESOP). The leveraged recap dramatically
increased the firm’s debt to capital ratio from zero in 1988 to 56% in 1989. Shortly thereafter, the
firm began a program of steady share repurchases. Despite the repurchase program, long-term debt
to capital fell to 42% by 1995. Exhibit 1 gives a 10-year summary of the financial characteristics of
the firm.
Over the past 10 years, the firm’s share price growth had lagged behind in the broad market
indexes. From 1986 to 1995, Polaroid’s compound annual sales growth rate was 3.6% in nominal
terms, and after adjusting for inflation, virtually zero. Earnings losses appeared in 1988, 1993, and
1995, and were associated with both declines in operating profit, and restructuring costs (consisting
of both severance payments and writeoffs). The sales and earnings results reflected the growing
maturity of the instant photography market in the United States as well as the absence of major new-
product introductions. Consistent with the perceived maturity of their market segment, Polaroid’s
price-earnings (P/E) ratio of 12.1 fell well below the market’s P/E of 15.2 in 1995.
The concerns over profitability and the lack of strong sales growth in cameras and film were
also echoed in the comments of analysts following the firm. One analyst described Polaroid’s
challenge:
Instant photography is a razor blade business. Cameras are sold at low margins to
encourage film sales. The company’s instant film sales are its primary margin
product. Expanding the “installed base” of camera enhances the opportunities to sell
film. The “burn rate” of film on newly purchased cameras, as might be expected, is
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highest and trails off in a reasonable predictable pattern thereafter. This correlation
allows the company to make reasonable estimates of film unit sales volume. It also,
obviously, means that there is a strong emphasis on selling cameras.1
The patents held by the company protected it from any significant competition domestically
in the field of instant photography. In international markets, Polaroid’s only competitor was Fuji
who had a film and instant-camera product that it marketed in Europe and Japan. Even in Japan,
however, Polaroid enjoyed a dominant market share. Thus, in the consumer market, Polaroid’s
strength in instant photography was unrivaled. In the commercial market, Polaroid’s sales derived
primarily from the use of instant photography for identification purposes (e.g., ID badges), and other
applications in medicine and law enforcement. Increasingly the expansion of digital imaging
threatened to erode the firm’s base of users, as customers shifted from instant photography to digital
solutions. In recent years, Polaroid’s Commercial Group accounted for approximately half of its total
sales and one-third of instant-film sales.2 In the digital arena, Polaroid faced stiff competition from
many well-capitalized technology companies, such as Xerox, 3M, and Sony. To date, Polaroid’s
development efforts in digital imaging had entailed heavy start-up costs.
Norwood acknowledged many of the same concerns, but felt that the analyst community had
taken a shortsighted view of Polaroid’s potential. Echoing its past, the firm continued to be “engaged
primarily in one line of business, the design, manufacture, and sale of instant photographic imaging
products worldwide,”3 with photographic products accounting for 90% of the firm’s revenues in
1995. Norwood said, “The basic business is low growth; but it’s an incredible annuity.” Second,
sales to international markets had strong growth potential. In many emerging-market countries, no
infrastructure existed to develop 35-mm film. With rising standards of living worldwide, there was a
large untapped market for instant photography, and Polaroid’s cameras were in high demand.
Exhibit 2 illuminates the growth in international revenues. The percentage mix of U.S. versus
international sales had almost precisely reversed from 1993 to 1995. This reversal reflected steady
growth in the international segment of between 3% and 8% per year. By contrast, sales in the United
States had fallen 2% in 1994, and 12% in 1995. Sales to Russia alone accounted for 9% of total sales
in 1995. Exhibits 3 and 4 give the latest year’s income statement and balance sheet for Polaroid.
Current Financing and Future Outlook
Against that backdrop, Norwood assessed the current and future financing requirements of
the firm. One important issue for consideration was the extent to which the financing of the firm
would be impacted by the plans of the new CEO. Gary DiCamillo was appointed Polaroid’s
chairperson and CEO following a successful term as president of Black & Decker’s PowerTools
unit. At Black & Decker, DiCamillo was viewed as an energetic leader, whose efforts were
instrumental in developing a line of new products that helped revive Black & Decker’s brand name.
DiCamillo brought similar energy and plans to Polaroid. Shortly after his arrival, he announced a
1
Duff & Phelps Credit Rating Report, Polaroid Corporation, Duff & Phelps, Inc., (18 November 1996), 2.
2
Polaroid–Company Report, Prudential Securities, (4 December 1996), 4.
3
Polaroid Annual Report 1995, 44.
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major restructuring of the firm, to reduce the workforce by some 2,500 positions (roughly 20%), and
to reduce expenses by more than $150 million annually. In particular, he terminated the production
of the Captiva camera, and curtailed several major research and engineering programs, emphasizing
instead the projects having the greatest potential for commercialization. Finally, he sharply reduced
corporate overhead costs. The effect of this restructuring was to trigger a special charge to earnings
in 1995 of $247 million caused by the severance and early retirement programs, and by the write-
down of equipment and inventory. As a result, Polaroid reported a net loss of $140.2 million,
compared with 1994 earnings of $117.2 million.
In February 1996, DiCamillo announced a new management structure built around three core
areas: consumer, commercial, and new business. The purpose of the new structure was to focus the
organization more effectively on customers’ imaging needs, and to integrate product development
responsibilities within each group. DiCamillo wrote:
Both the restructuring and reorganization reflect my conviction that we can grow our
core photographic and emerging electronic imaging businesses. I believe we can
leverage our considerable brand power, technological expertise, and global
distribution reach to create new growth opportunities and revitalize our instant
photography business.4
To meet its various financing needs, Polaroid maintained a five-year $150 million working-
capital line of credit to be used for general purposes. The line was set to expire in 1999. In 1994 and
1995, there had been no borrowings under this line. The company maintained international lines of
credit to support the firm’s foreign currency balance sheet exposure. At the end of 1995, borrowings
outside the United States were $160.4 million. Additional unused borrowings under these lines of
credit were $160 million.
Polaroid’s long-term debt outstanding consisted of three issues:
4
Quoted from Letter to Shareholders, Polaroid Annual Report 1995, 3.
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• Notes: $150-million, 7.25% notes due January 15, 1997, had been issued at a discount (to
yield 7.42%). $200-million, 8% notes were due March 15, 1999 and had been issued with a
discount to yield 8.18%. Both issues of notes were noncallable.
• ESOP loan: The loan had been drawn in 1988 to establish Polaroid’s leveraged employee
stock ownership plan (ESOP), as part of the leveraged recapitalization of the firm. Scheduled
principal payments were made semiannually through 1997 when a final payment of $37.7
million was due. The weighted-average interest rate on the loan was 5.2%, 4.4%, and 3.6%
during 1995, 1994, and 1993 respectively. Special tax benefits to providers of ESOP loans
accounted for the unusually low interest rates.
• Convertible subordinated debentures: $140 million, 8% convertibles due in 2001. These
carried an annual interest rate of 8%, and were convertible to common stock at $32.50 per
share. These were redeemable by the company after September 30, 1998, or sooner if the
stock price exceeded $48.75 per share for 20 of 30 consecutive trading days. All of the
debentures were held by Corporate Partners.5
Virtually all of the firm’s debt was due within six years. As Ralph Norwood commented,
“The weighted-average maturity structure of our debt was about four years. All our borrowings
would need to be repaid or refinanced in a relatively short time.” Exhibit 5 illustrates the estimation
of Polaroid’s weighted-average maturity of its debt.
In addition to the scheduled debt repayments, Ralph Norwood reviewed other possible
demands on the firm’s resources. He believed that capital expenditures would about equal
depreciation for the next few years. Also, though sales might grow, working capital turns should
decline, resulting in a reduction in net working capital in the first year, followed by increases later.
Both of those effects reflected the tight asset management under the new CEO. While cash dividends
would be held constant for the foreseeable future, the firm would continue with its program of
opportunistic share repurchases, which had varied between $20 million and $60 million per year.
Exhibit 1 summarizes the firm’s share repurchase activity in recent years.
Exhibit 6 gives a five-year forecast of Polaroid’s income statement and balance sheet. This
forecast was consistent with the lower end of analysts’ projections for revenue growth and
realization of the benefits of DiCamillo’s restructuring program. It assumed that the existing debt
would be refinanced with similar debt. Major share repurchases were not presumed in the forecast.
The forecast would need to be revised to reflect the impact of any recommended changes in financial
policy.
5
If the rights were fully exercised, the resulting stock would represent approximately a 9% stake in Polaroid. The
company was currently attempting to negotiate the repurchase of the conversion rights from Corporate Partners. On
March 29, 1996, Polaroid’s share price closed at $44.00. The annualized volatility or “sigma” of returns on Polaroid’s
shares over the previous 100 days was 17.7%. The yield on 6-year U.S. Treasury notes was 6.05%.
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Considerations in Assessing Financial Policy
In addition to assessing the firm’s internal financing requirements, Norwood also recognized
that his policy recommendation would have an important role in shaping the perceptions of the firm
by the bond-rating agencies and investors.
• Bond Rating: Polaroid currently had a “split” rating where Standard & Poor’s rated the
firm’s senior6 long-term debt BBB and Moody’s rated it Baa3, (roughly equivalent to a BBB-
in the Standard & Poor’s system). Exhibit 7 presents the bond-rating definitions for this and
other rating categories. BBB/Baa3 was an “investment-grade” rating, whereas the next rating
grade lower (BB/Ba) was “noninvestment grade” and often referred to as “high yield or junk
debt.” Some large investors (such as pension funds and charitable trusts) were barred from
investing in noninvestment-grade debt. Many individual investors shunned it as well. For

that reason, the yields on noninvestment-grade debt over U.S. Treasury securities (i.e.,
spreads) were typically considerably higher than the spreads for investment-grade issues.
Also, the ability to issue noninvestment-grade debt depended to a much greater degree on the
strength of the economy, and on favorable credit market conditions than did investment-
grade debt.
Norwood said:
You don’t pay much of a penalty in yield as you go from A to BBB. There’s
a range over which the risk you take for more leverage is minimal. But you
pay a big penalty as you go from BBB to BB. The penalty is not only in the
form of higher costs, but also in the form of possible damage to the Polaroid
brand. We don’t want the brand to be sullied by the association with junk
debt.
For those reasons, Ralph Norwood sought to preserve an investment-grade rating for
Polaroid. But where in the investment-grade range should Polaroid be positioned? Exhibit 8
summarizes the bond ratings for a sample of Polaroid’s peer firms, which Norwood described as
“large global consumer technology-products companies,” and for a large sample of firms in general.
Exhibit 9 gives financial ratios associated with the various rating categories. Although Norwood
knew the ratings agencies looked closely at the debt to capital ratio (“debt capitalization”), he
believed that the EBIT coverage ratio was also a good measure of credit quality. Exhibit 10 gives
Polaroid’s EBIT coverage ratios for the past 10 years. Norwood’s decision would require him to first
choose a target bond rating. Then he would have to determine the minimum and maximum amounts
of debt that Polaroid could carry to achieve the desired rating.
• Flexibility: Norwood was also aware that choosing a target debt level based on an analysis
of industry peers might not fully capture the flexibility Polaroid would need to meet its own
possible future adversities.
6
The convention in finance is that the “firm’s bond rating” refers to the rating on the firm’s senior debt, with the
understanding that any subordinated debt issued by the firm will ordinarily have a lower bond rating. For instance,
Polaroid’s senior debt had the split BBB/Baa3 rating, while its subordinated convertible bonds were rated BB/Ba.
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Norwood said:
Flexibility is how much debt you can issue before you lose the investment-
grade bond rating. I want flexibility, and yet I want to take advantage of the
fact that with more debt you have, the lower the cost of capital. I am very
comfortable with our strategy and internal financial forecasts for our
business; if anything, I believe the forecasts probably underestimate, rather

than overestimate our cash flows. But let’s suppose that a two-sigma adverse
outcome would be an EBIT equal to $150 million—I can’t imagine in the
worst of times an EBIT less than that.
Accordingly, Norwood’s final decision on the target bond rating would have to be one that
maintained reasonable reserves against Polaroid’s worst-case scenario.
• Cost of Capital: Consistent with management’s emphasis on value creation, Norwood

believed that choosing a financial policy that minimized the cost of capital was important.
He understood that the exploitation of debt tax shields could create value for shareholders—
up to a reasonable limit, and that beyond the limit, the costs of financial distress would
become material, and cause the cost of capital to rise. One investment bank, Hudson
Guaranty, presented Norwood with estimates of the pretax cost of debt and cost of equity by
rating category. Those estimates are given in Exhibit 11. The cost of debt was estimated by
averaging the current yield-to-maturity of bonds within each rating category. The cost of
equity (ke) was estimated by Hudson Guaranty using the capital asset pricing model
(CAPM). The cost of equity was computed for each firm using its beta and other capital
market data. The individual estimates of ke were then averaged within each bond-rating
category. Norwood remarked on the relatively flat trend in the cost of equity within the
investment-grade range. Hudson Guaranty replied, “Changes in leverage within the
investment-grade range are not regarded as material to investors.” It remained for Norwood
to determine which rating category provided the lowest costs of capital.
• Current Capital Market Conditions: Any policy recommendations would need to
acknowledge the feasibility of implementing those policies today as well as in the future.
Exhibit 12 presents information about current yields in the U.S. debt markets. The current
situation in the debt markets was favorable as the U.S. economy continued in its fifth year of
economic expansion. The equity markets seemed to be pausing after a phenomenal advance
in prices in 1995. The outlook for interest rates was stable, though any sign of inflation might
cause the U.S. Federal Reserve Board to lift interest rates. Major changes in taxes and
regulations were in abeyance, at least until the outcome of the presidential elections to be
held in November 1996.
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Conclusion
Ralph Norwood leafed through the analyses and financial data he had gathered for his
recommendations. He reflected on the competing goals of value creation, flexibility, and bond rating.
His plan would have to afford Polaroid low costs and continued access to capital under a variety of
operating scenarios. This would require him to test the possible effect of downside scenarios on
Polaroid’s coverage and capitalization ratios under alternative debt policies. He aimed to recommend
a financial policy that would balance those goals and provide guidance to the directors and the
financial staff regarding the target mix of capital and the maturity structure of the company’s debt.
With so many competing factors to weigh, Norwood felt it unlikely that his plan would be a “perfect
plan.” But then he remembered one of Gary DiCamillo’s favorite sayings: “If you wait until you
have a 99% solution, you’ll never act; go with an 80% solution.”
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Exhibit 1
Ten-Year Financial Summary
(in US$ millions except per-share values and numbers of shares)
At fiscal year ended, December 31
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
Selected Income Statement Information
Net Sales U.S. $1,019.0 $1,160.3 $1,178.8 $1,145.7 $1,113.6 $1,058.3 $1,091.8 $1,048.3 $1,009.3 $964.3
International 1,217.9 1,152.2 1,066.1 1,006.6 957.0 913.4 812.9 814.6 754.6 664.9
Total 2,236.9 2,312.5 2,244.9 2,152.3 2,070.6 1,971.7 1,904.7 1,862.9 1,763.9 1,629.2
Operating Expenses 2,147.7 2,112.2 2,059.5 1,938.5 1,824.0 1,687.4 1,600.5 1,689.1 1,610.1 1,493.5
Profit from Opns. Before Restructuring Exp. 89.2 200.3 185.4 213.8 246.6 284.3 304.2 173.8 153.8 135.7
Restructuring Expense 247.0 0.0 44.0 0.0 0.0 0.0 40.5 151.9 0.0 0.0
Interest Expense 52.1 46.6 47.9 58.5 58.4 81.3 86.2 29.0 15.0 18.6
Net Earnings -140.2 117.2 -51.3 99.0 683.7 151.0 145.0 -22.6 125.2 108.2
Common Shares, End of Year (000s) 45,533 45,998 46,806 46,668 48,919 50,070 52,110 71,635 61,918 61,918
Common Shares Repurchased (000s) 1,218 941 0 2,258 1,151 2,040 19,525 0 0 0
Repurchase Outlay ($ millions) $40.2 $30.6 $0.0 $63.4 $30.6 $55.6 $950.6 $0.0 $0.0 $0.0
Common Shares Issued (000s) 753 133 138 7 0 0 0 9,717 0 0
Earnings Per Share -$3.09 $2.49 -$1.10 $2.06 $12.54 $2.20 $1.96 -$0.34 $2.02 $1.75
Dividend Per Share $0.60 $0.60 $0.60 $0.60 $0.60 $0.60 $0.60 $0.60 $0.60 $0.50
Selected Balance Sheet Information

Working Capital $738.5 $886.8 $833.6 $789.0 $695.3 $609.1 $642.0 $980.0 $652.6 $602.4
Net Property, Plant & Equipment 691.0 747.3 718.2 657.3 549.4 461.0 430.9 433.8 359.6 357.7
Total Assets 2,261.8 2,316.7 2,212.3 2,008.1 1,889.3 1,701.3 1,776.7 1,957.2 1,599.4 1,444.6
Long-Term Debt 526.7 566.0 602.3 637.4 471.8 513.8 602.2 402.3 0.0 0.0
Redeemable Preferred Stock 0.0 0.0 0.0 0.0 0.0 348.6 321.9 0.0 0.0 0.0
Common Stockholders' Equity 717.7 864.4 767.3 808.9 772.9 207.7 148.8 1,011.5 1,048.2 960.1
Addns. to Property Plant and Equip. 167.9 146.7 165.6 201.5 175.8 120.9 94.5 127.0 116.6 82.9
Depreciation $132.7 $118.2 $100.3 $89.1 $85.5 $87.2 $87.4 $81.9 $75.7 $71.2
Book Value LT Debt/Capital 42.3% 39.6% 44.0% 44.1% 37.9% 48.0% 56.1% 28.5% 0.0% 0.0%
Market Value LT Debt/Capital 19.6% 27.5% 27.8% 30.5% 26.6% 25.3% 28.5% 23.4% 0.0% 0.0%
Selected Valuation Information (at years' ends)

Polaroid Stock Price $47.38 $32.50 $33.50 $31.13 $26.63 $23.38 $22.88 $18.38 $11.88 $33.25
S&P 500 Index 615.93 459.27 466.25 435.71 417.09 330.22 353.40 277.72 247.08 242.17
Polaroid Average P/E (1) 12.1 13.3 15.6 14.2 12.2 15.6 21.8 NMF 14.7 16.6
S&P Industrials Average P/E (1) 15.2 15.5 18.4 19.8 19 14.4 12.6 10.8 15.3 17.5
Polaroid Market/Book Ratio 3.01 1.73 2.04 1.80 1.69 5.63 8.01 1.30 0.70 2.14
Polaroid Beta 1.05 1.05 1.15 1.15 1.20 1.25 1.25 1.25 1.20 1.10
Yield on 30-Year T-Bonds 6.88% 7.37% 6.59% 7.67% 8.14% 8.61% 8.45% 8.96% 8.59% 7.80%
Yield on 90-day T-Bills 5.49% 4.25% 3.00% 3.43% 5.38% 7.50% 8.11% 6.67% 5.78% 5.97%
Total Annual Return on Large Co. Stocks 33.00% 1.30% 9.90% 7.67% 30.55% -3.17% 31.49% 18.81% 5.23% 18.47%
Notes: 1. P/E ratios are computed on earnings before restructuring charges, litigation award, and other extraordinary items.
Sources: Polaroid Annual
Standard
Report 1995, Value Line Investment Survey, Federal Reserve Bulletin, Page 9 of&20
Poor’s Current Statistics, Ibbotson Associates, Stocks, Bonds, Bills, Inflation 1995.
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Exhibit 2
Source of graph data: Polaroid Annual Report 1995, 48–49.
Estimated Quarterly Polaroid Sales to Russia

($ 1993 1994 1995
millions)
1st Quarter 0 $22 m $38 m
2nd Quarter 0 24 35
3rd Quarter $10 m 51 74
4th Quarter 10 57 49
Full Year $20 m $154 m $196 m

Source: B.L. Landry, “Polaroid—Company Report” Morgan Stanley & Co., Oct. 25, 1996.
Performance by Geographic Segment

($ millions, eliminations of inter-regional amounts not shown) 1993 1994 1995
Sales: U.S. $1,609.6 $1,656.6 $1,498.4
Europe 945.2 1,051.7 1,106.9
Asia Pacific, Canada, Latin & South America 524.7 531.1 602.4
Profits/(loss): U.S. $44.1 $100.8 $(179.4)

Europe 43.7 81.8 20.6
Assets: U.S. $1,532.7 $1,480.5 $1,526.1

Europe 556.0 613.8 669.9
Source: Polaroid Annual Report 1995, 45.
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Exhibit 3
Income Statement: Consolidated Statement of Earnings
(in $ millions)
Years ended December 31,

1995 1994
Net Sales
United States $1,019.0 $1,160.3
International 1,217.9 1,152.2

Total Net Sales 2,236.9 2,312.5
Cost of Goods Sold 1,298.6 1,324.2

Marketing, Research, & Admin. 849.1 788.0
Restructuring & Other. 247.0 0.0
Total Costs 2,394.7 2,122.2
Profit/(Loss) from Operations -157.8 200.3
Interest Income 8.7 9.7

Other Income -0.2 -2.7
Interest Expense 52.1 46.6
Earnings/(Loss) Before Taxes -201.4 160.7
Tax Expense -61.2 43.5
Net Earnings/(Loss) -140.2 117.2
Source: Polaroid Annual Report 1995.
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Exhibit 4
Balance Sheet
(in $ millions)
1995 1994
Assets
Current Assets
Cash and Cash Equivalents $73.3 $143.3
Short-Term Investments 9.8 85.6
Receivables, less allowances 550.4 541.0
Inventories 615.5 577.4
Prepaid Expenses and Other 208.5 141.4

Total Current Assets 1,457.5 1,488.7
Gross Property Plant and Equipment 2,164.4 2,043.4
Less Accumulated Depreciation 1,473.4 1,296.1
Net Property, Plant and Equipment 691.0 747.3
Prepaid Taxes -- non-current 113.3 80.7
Total Assets $2,261.8 $2,316.7
Liabilities and Stockholders' Equity

Current Liabilities
Short-Term Debt $160.4 $117.1
Current Portion of Long-Term Debt 39.7 35.9
Payables and Acrruals 274.9 275.7
Compensation & Benefits 197.4 121.4
Taxes Payable 46.6 51.8
Total Current Liabilities 719.0 601.9
Long-Term Debt 526.7 566.0
Accrued Postretirement Benefits 257.2 247.2
Accrued Postemployment Benefits 41.2 37.2
Total Liabilities 1,544.1 1,452.3
Preferred Stock 0.0 0.0
Common Stockholders' Equity
Common Stock (1) 75.4 75.4
Additional Paid-In Capital 401.9 387.2
Retained Earnings 1,525.8 1,692.1
Less Treasury Stock, at Cost 1,205.4 1,174.5
Less Deferred Compensation 80.0 115.8
Total Common Stockholders Equity 717.7 864.4
Total Liabilities and Stockholders' Equity $2,261.8 $2,316.7
Source: Polaroid Annual Report 1995.
Page 12 of 20
-13- UVA-F-1181
Exhibit 5
Maturity Structure of Debt
Debt Repayment Debt Repayment Maturity Weighted

($ millions) (% of total) (years) maturity
(years)
1996 $ 39.7 7.0 1 0.07
1997 187.8 33.0 2 0.66

1998 0 0 3 0
1999 200.0 35.0 4 1.41
2000 0 0 5 0
2001 140.0 25.0 6 1.48
Total $567.5 100% 3.62 years
Note: For simplicity, this table assumes all debt payments are made on an annual basis. Any semiannual or quarterly
principal payments would slightly reduce the estimated weighted maturity.
Source: Case writers’ analysis.
Page 13 of 20
-14- UVA-F-1181
Exhibit 6
Financial Forecast, 1996–2000
(values in US$ millions)
Actual Projected
1995 1996 1997 1998 1999 2000
Annual Increase in Sales -3.2% 2.0% 5.0% 6.0% 6.0% 7.0%
Opng. Profit/Sales 4.0% 8.0% 9.5% 10.0% 10.0% 10.0%
Tax Rate 40.0%

Wkg. Capital/Sales 37.0%
Income Statement
Net Sales $ 2,236.9 $ 2,281.6 $ 2,395.7 $ 2,539.5 $ 2,691.8 $ 2,880.3
Operating Profit 89.2 182.5 227.6 253.9 269.2 288.0
Interest Income 8.5 5.0 5.0 5.0 5.0 5.0
Interest Expense -52.1 (52.1) (52.1) (52.1) (52.1) (52.1)
Pre-Tax Income 45.6 135.4 180.5 206.8 222.1 240.9
Tax Expense -61.2 (54.2) (72.2) (82.7) (88.8) (96.4)
Net Income -15.6 81.3 108.3 124.1 133.2 144.6
Dividends 27.3 27.3 27.3 27.3 27.3 27.3
Retentions to Earnings $ (42.9) $ 53.9 $ 81.0 $ 96.8 $ 105.9 $ 117.2
Balance Sheet
Cash $ 83.1 $ 148.3 $ 187.1 $ 230.7 $ 280.3 $ 327.8
Working Capital (without debt) 855.5 844.2 886.4 939.6 996.0 1,065.7
Prepaid Tax 113.3 113.3 113.3 113.3 113.3 113.3
Net Fixed Assets 691.0 691.0 691.0 691.0 691.0 691.0
Total Assets 1,742.9 1,796.8 1,877.8 1,974.6 2,080.5 2,197.8
Debt (long and short term) 726.8 726.8 726.8 726.8 726.8 726.8
Other Long-Term Liabilities 298.4 298.4 298.4 298.4 298.4 298.4
Stockholders' Equity 717.7 771.6 852.6 949.4 1,055.3 1,172.6
Total Liabilities & Stockholders' Equity $ 1,742.9 $ 1,796.8 $ 1,877.8 $ 1,974.6 $ 2,080.5 $ 2,197.8
Free Cash Flows

EBIT $ 182.5 $ 227.6 $ 253.9 $ 269.2 $ 288.0
Less Taxes on EBIT (73.0) (91.0) (101.6) (107.7) (115.2)
Plus Depreciation 140.0 140.0 140.0 140.0 140.0
Less Capital Expenditures (140.0) (140.0) (140.0) (140.0) (140.0)
Less Additions/plus Reductions in Wkg. Cap. 11.3 (42.2) (53.2) (56.4) (69.7)
Free Cash Flow $ 120.8 $ 94.3 $ 99.2 $ 105.1 $ 103.1
Source: Case writers’ analysis, consistent with forecast expectations of securities analysts.
Page 14 of 20
-15- UVA-F-1181
Exhibit 7
Moody’s Bond-Rating Definitions
Aaa Bonds that are rated Aaa are judged to be of the best quality. They carry the smallest degree
of investment risk and are generally referred to as “gilt edge.” Interest payments are
protected by a large or by an exceptionally stable margin and the principal is secure. While
the various protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa Bonds that are rated Aa are judged to be of high quality by all standards. Together with the
Aaa group, they comprise what are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuations of protective elements may be of greater amplitude or there may be
other elements present which make the long term risks appear somewhat larger than in Aaa
securities.
A Bonds that are rated as A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to principal and
interest are considered adequate but elements may be present that suggest a susceptibility to
impairment sometime in the future.
Baa Bonds that are rated Baa are considered as medium grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payment and principal security appear adequate
for the present but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba Bonds that are rated Ba are judged to have speculative elements; their future cannot be
considered as well assured. Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good and bad times in the
future. Uncertainty of position characterizes bonds in this class.
B Bonds that are rated B generally lack characteristics of the desirable investment. Assurance
of interest and principal payments or of maintenance of other terms of the contract over any
long period may be small.
Caa Bonds that are rated Caa are of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest.
Ca Bonds that are rated Ca represent obligations that are speculative to a high degree. Such
issues are often in default or have other marked shortcomings.
C Bonds that are rated C are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real investment standing.
Source: Moody’s Industrial Manual 1995, page vi.
Page 15 of 20
-16- UVA-F-1181
Exhibit 8
Distribution of Peer Firms’ Bond Ratings
Peers Moody’s Rating S&P’s Rating

Minnesota Mining and Aaa AAA

Manufacturing
Eastman Kodak Aa AA
Hewlett-Packard
Fuji
Xerox A A
Sony
Black & Decker Baa BBB

Polaroid
Tektronix
Digital Equipment Ba BB
Source: Company document.
Source of graph: Company documents, and Hudson Guaranty analysis reflecting all rated firms with market value
between $250 million and $10 billion at year-end 1995.
Page 16 of 20
-17- UVA-F-1181
Exhibit 9
Key Industrial Financial Ratios by Rating Categories:
Median Values for the Three Years 1993–1995
AAA AA A BBB BB B
Pretax interest coverage (x) 13.50 9.67 5.76 3.94 2.14 1.17
EBITDA Interest coverage (x) 17.08 12.80 8.18 6.00 3.49 2.16
Funds from operations/total debt (%) 98.20% 69.10% 45.50% 33.30% 17.70% 12.80%
Free operating cash flow/total debt (%) 60.00% 26.80% 20.90% 7.20% 1.40% -0.90%
Pretax return on permanent capital (%) 29.30% 21.40% 19.10% 13.90% 12.00% 9.00%
Operating income/sales (%) 22.60% 17.80% 15.70% 13.50% 13.50% 12.30%
Long-term debt/capital (%) 13.30% 21.10% 31.60% 42.70% 55.60% 65.50%
Total debt/capitalization incl. short-term debt (%) 25.90% 33.60% 39.70% 47.80% 59.40% 69.50%
Source: Standard & Poor's CreditWeek October 30, 1996, page 26.
Standard and Poor’s defined those ratios based on the book value of these items as follows:
1
Long-term debt/capital = Long-term debt/(Long-term debt + Stockholders’ equity).
2
Total debt/Capital including short-term debt = (Short-term debt + Long-term debt)/(Short-term debt + long-term debt +
stockholders’ equity).
3
Pretax interest coverage is EBIT/interest expense.
4
EBIT plus depreciation and amortization/interest expense.
Source: Standard & Poor’s CreditWeek, 30 October 1996, 26.
Page 17 of 20
-18- UVA-F-1181
Exhibit 10
EBIT Coverage Ratios by Year
Note: The interest coverage ratio is calculated as EBIT before restructuring costs, divided by interest expense.
Source: Company document.
Page 18 of 20
-19- UVA-F-1181
Exhibit 11
Capital Costs by Rating Category
AAA AA A BBB BB B
Cost of
debt 6.70% 6.90% 7.00% 7.40% 9.00% 10.60%
(pretax)
Cost of
10.25% 10.3% 10.4% 10.5% 11.75% 13.00%
equity
Source: Company documents and analysis by Hudson Guaranty using August 1995 data calculated for 314 publicly rated industrial
firms, and adjusted to reflect capital market conditions in March 1996.
Page 19 of 20
-20- UVA-F-1181
Exhibit 12
Capital-Market Conditions
(March 26, 1996)
U.S. Treasury Obligations Yield

90-day bills 5.08%
1-year notes 5.37%
5-year notes 6.00%
10-year bonds 6.24%

15-year bonds 6.42%
20-year bonds 6.72%
25-year bonds 6.77%
Corporate Debt Obligations (10-year)

AAA 6.73%
AA 6.87%
A 7.04%
BBB 7.40%
BB 9.10%
B 10.52%
Other Instruments
Prime-rate loans 8.25%
Federal Reserve Bank
Discount rate 5.00%
Certificates of deposit (90 day) 5.29%
Commercial paper (6 months) 5.26%
Page 20 of 20

08 Poloroid Corporation

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DardenBusinessPublishing:228780

POLAROID CORPORATION, 1996

The Early Years

Recent Financial Performance

Current Financing and Future Outlook

responsibilities within each group. DiCamillo wrote:

Polaroid’s long-term debt outstanding consisted of three issues:

Considerations in Assessing Financial Policy

investing in noninvestment-grade debt. Many individual investors shunned it as well. For

business; if anything, I believe the forecasts probably underestimate, rather

maintained reasonable reserves against Polaroid’s worst-case scenario.

• Cost of Capital: Consistent with management’s emphasis on value creation, Norwood

Selected Balance Sheet Information

Selected Valuation Information (at years' ends)

Source of graph data: Polaroid Annual Report 1995, 48–49.

Estimated Quarterly Polaroid Sales to Russia

3rd Quarter $10 m 51 74

Full Year $20 m $154 m $196 m

Performance by Geographic Segment

Profits/(loss): U.S. $44.1 $100.8 $(179.4)

Assets: U.S. $1,532.7 $1,480.5 $1,526.1

Years ended December 31,

International 1,217.9 1,152.2

Cost of Goods Sold 1,298.6 1,324.2

Interest Income 8.7 9.7

Source: Polaroid Annual Report 1995.

Prepaid Expenses and Other 208.5 141.4

Liabilities and Stockholders' Equity

Source: Polaroid Annual Report 1995.

Debt Repayment Debt Repayment Maturity Weighted

1997 187.8 33.0 2 0.66

Source: Case writers’ analysis.

Tax Rate 40.0%

Free Cash Flows

Peers Moody’s Rating S&P’s Rating

Minnesota Mining and Aaa AAA

Black & Decker Baa BBB

Source: Standard & Poor’s CreditWeek, 30 October 1996, 26.

Source: Company document.

U.S. Treasury Obligations Yield

10-year bonds 6.24%

Corporate Debt Obligations (10-year)

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